Can DeFi Break Into Mainstream?
VYSYN Ventures Weekly Insights #57 - How DeFi exploded since 2020 and what the space has in store for the future
Developments over the past year have not just brought the concept of decentralized finance (DeFi) into the limelight but they have also set the tone for the future of finance. DeFi disrupted the financial industry by bringing partially prohibited services to netizens in a permissionless manner.
DeFi exposed disruptive possibilities in countless industries. Lending, borrowing, insurance, and other aspects of finance were changed as traditional services were replicated on decentralized protocols. However, while it has gained widespread adoption among cryptocurrency enthusiasts, it has yet to break into the mainstream with enterprises steering away and integration with tech companies remaining limited.
In the latest VYSYN Release, we take a closer look at how the DeFi ecosystem has evolved and its potential to break into the mainstream. The growth of DeFi has also extended beyond simply offering broader services in a decentralized manner. The DeFi explosion also changed the lives of many, with a price performance for DeFi assets that was unparalleled since the 2017 cryptocurrency bull run.
Yearn.Finance performance sparks new wave of interest
Yearn.Finance (YFI) was one of the earliest DeFi projects to record a phenomenal price performance. It is an aggregator platform that enables DeFi investors to maximize profit through automated yield farming. The Yearn.Finance platform is highly suitable to non-technical traders and serves as a useful tool to help them identify the most attractive yield farming opportunities.
Yearn.Finance recorded a phenomenal price performance, with the YFI price rising from roughly $5k in August 2020 to an all-time high of $95k in May. This growth sparked a lot of speculation in the industry, leading many to anticipate that a bubble was being formed. At the same time, it helped raise awareness in the DeFi industry and many people both inside and outside the crypto industry became more inquisitive about DeFi and the developments surrounding it.
The breakthrough by Yearn.Finance brought on a new wave of interest in the DeFi space. It inspired the creation of countless DApps in the DeFi ecosystem that have served to provide novel solutions and generate even more curiosity. In the process, even highly respected figures in the world of business got exposure to the asset class. For instance, Mark Cuban recently revealed how he had exposure to a DeFi protocol that suffered a lapse.
Will DeFi disrupt mainstream tech?
Understandably, at its current stage of development, adopting DeFi into the mainstream comes with a lot of risks. Key factors like security, scalability, financial privacy, and credit scoring are still issues that the industry is yet to resolve. However, data shows that the total number of users continued to grow regardless of these issues.
When the industry gets to the stage where these issues have been resolved, it is likely that several businesses that already have some cryptocurrency-related activities will get exposure to the industry. Enterprises like Robinhood, Revolut, Square, and SoFi are all well-positioned to experiment with and capitalize on the growing DeFi industry. These major technology platforms already have a user base numbered in the millions and decamillions. If they adopt DeFi technology, it would be a major testament to its potential to break into the mainstream.
Central banks have also been experimenting with DeFi and cryptocurrency-related activities through the issuance of central bank digital currencies (CBDCs). China has already made significant progress in this field after trialling a digital Yuan system in several regions. The system was recently implemented into the Beijing subway for testing. Europe and several other regions are also testing their own decentralized digital currency systems.
DeFi remains high-risk high-reward
Despite the potential of DeFi, it has yet to break into the mainstream. As it stands, it is mainly speculators and cryptocurrency technology enthusiasts who are actively using the network. The recent exploits in many of the existing protocols suggest that it is still a maturing industry that requires more security before mainstream adoption can be secured.
However, that means there is still abundant opportunity in the space for those who can navigate it shrewdly. After achieving mainstream adoption, the harsh reality is that the potential rates of returns for investing in DeFi will reduce as a result. This is characteristic of any industry. When the risk declines as adoption and security rises, the rate return will naturally reduce alongside the risk.
As it stands, there is still high risk in the ecosystem. A series of hacks and exploits began to take place shortly after DeFi entered the limelight in 2020 and they have not slowed down since. The trend of exploitations has continued into 2021, with even more significant hacks occurring. This includes the loss of over $37 million from a flash loan exploit.
Situations like these show that the industry still needs to advance further before mainstream money can flow in. The financial industry has a lot to gain with the implementation of DeFi but few enterprises will consider implementing the technology while bugs and exploits remain prevalent. In the meantime, cryptocurrency enthusiasts who effectively navigate the ecosystem can continue to enjoy outsized returns.